How do you budget with fluctuating income?

Question

My husband is in the automotive field. His paycheck can fluctuate about $3500 a month. He could have a really busy month and be on the higher end, or a very slow month and be on the lower end. We always have extra money for slower times, but how can you budget for everything else when you never know how much money comes in each month? He is paid every two weeks. The first week could be a big paycheck, but the second a small one. What should we do? Just take an average income and budget for that? He ends up making the same amount each year.

Answer 1

Have 3 accounts. Use 1 to put in all the money you need for things you have to pay for, mortgage/rent, bills, food etc. then use this account only for paying those bills. Just work out a monthly average.

2nd account to put in 'top up' money for those bills, ideally save the equivalent of 3 months costs, so that if you have several low pay cheques in a row or he is off sick it gives you breathing space.

3rd account for anything that is left after the 1st two! Then you know what is to spare for holidays, treats, new tv, furniture etc.

This does work & really evens out after a few months, even with irregular payments.

Answer 2

Ideally you should talk to a fee only financial planner about your situation. It is complex and therefore it is important for you to be properly informed by a professional about all your options.

That being said, here are some things you may want to keep in mind (which is NOT a substitute for professional advice).

1) Pad your emergency fund. Convention states that you should have 3-6 months worth of living expenses on hand and readily available to you at all times. If your income is unpredictable it will be imperative that you have a solid emergency fund.

2) I would always assume that I'd be making LESS rather than MORE, and plan accordingly. For example, let's say I want to buy a car. i could buy a cheaper one with payments of 150$, or an more expensive one with payments of 200$.

If I know I could either make 200 or 400 dollars a month, but I'll never know which, it would be irresponsible for me to assume that I will be able to pull in the larger amount every month, the 400$. Therefore I should go with the cheaper car, which will leave me some money left at the end of the month for other things, as opposed to the more expensive car, whose payments of 200$ will make things tight if suddently I learn that I will not, in fact be making 400$ this month as planned.

3) Your fixed spending should probably be based on your low estimated income (as discussed in 2). Your variable spending should be monitored accordingly. I suggest not buying things unless you have the cash. If you have a credit card, it is easy to simply charge something and assume (and HOPE!) that you'll have the money coming in. I would wait until you've already received your paycheck, and then spend what you can afford.

You can keep track of your purchases using this handy budget template I created. You can download it here:

http://www.btgnow.net/2008/07/btg-downlo...

Again, your best bet is to speak to a professional.

Good luck!